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Exclusion of a Trustee’s “Prudent Person” Duty

On 23 December 2016, Justice Edelman handed down his decision in Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552. One of the central issues in this decision was whether a trust deed could exclude the statutory “prudent person” duty contained in section 22 of the Trusts Act 1973 (Qld). A copy of the judgement is available here.

In that case, ASIC alleged that several former directors of LM Investment Management Ltd (“LMIM”) had breached their directors duties by “causing or permitting” LMIM to approve an additional advance of funds by LMIM in its capacity as trustee of the Managed Performance Fund (“MPF”) (an unregistered managed investments scheme) “in a manner which caused LMIM to commit a breach of trust against MPF.” ASIC’s contention was that the relevant breach was of the Prudent Person Duty contained in section 22 of the Trusts Act 1973 (Qld), and that that provision could not be excluded or modified, notwithstanding that the relevant trust instrument creating the MPF purported to do just that.

However Edelman J ultimately held that not only could the duty in fact be excluded, it had been validly excluded in this case. In doing so His Honour considered “three significant textual indications why s22(1) of the Trusts Act does not restrict exclusions or limitations of liability in the trust instrument”[1]:

Section 4(4) of the Trusts Act provides that “The powers conferred by or under this Act on a trustee are in addition to the powers given by any other Act and by the instrument (if any) creating the trust; but the powers conferred on the trustee by this Act, unless otherwise provided, apply if and so far only as a contrary intention is not expressed in the instrument (if any) creating the trust, and have effect subject to the terms of that instrument.”[emphasis added]. Even though that section referred to powers instead of duties, His Honour held that “the duty is one which arises in exercise a power of investment”[2] and “the content of the duty depends upon the terms of the power.”[3]

Other sections of the Trusts Act expressly entrench the statutory obligations by providing that the terms apply despite anything contained in the instrument creating the trusts (such as sections 10, 31, 60, 65, 79, 111).

Because section 23(3) Trusts Act provides that: “A rule or principle of law or equity relating to a provision in an instrument creating a trust that purports to exempt, limit the liability of, or indemnify a trustee in relation to a breach of trust, continues to apply.” His Honour went on to say that “The function of s 23(3) seems to be the preservation of rules of law and equity concerning provisions in a trust instrument that exempt or limit a trustee’s liability. Those rules of law and equity sometimes restrict the operation of such clauses (for instance, a clause which purports to exempt liability for fraud will be void). Or, as we have seen, they can recognise the efficacy of such clauses. Section 23(3), which provides that such principles of law continue to apply, would be a curious provision if the previous provision, s 22(1), had excluded them.”[4]

In addition to the textual indications present in the Act itself, His Honour also considered relevant that the construction urged by ASIC would lead to anomalous results in the operation of the Act[5] (i.e. that the prudent person duty could not be excluded in circumstances where there was no such restriction on exclusion of fiduciary duties), and also that state other than Queensland had adopted similar legislation which expressly permitted the exclusion of the duty[6]

It is important to get legal advice to ensure the relevant duty is properly excluded. Accordingly, if you are considering creating or amending a trust which will seek to exclude this duty or other duties,

[1]Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552 at [328][2]Ibid at [330][3]Ibid at [330][4]Ibid at [344][5]Ibid at [351][6]Ibid at [348] to [350]